Corporate taxes

Hiking corporate taxes is the latest populist battle cry, the recommended antidote to heavier across-the-board tax burdens dictated by growing budgetary deficits. Its bottom line is facile and fetching – tax the rich, big business, those who take ordinary folks’ money and rake in the capital.

This rallying call is sounded from all sides of the political arena, foremost perhaps because simplistic messages are regarded as vote-magnets.

And thus Labor head Shelly Yechimovich charges that “Prime Minister Binyamin Netanyahu appears as the Santa Claus of the rich” for refusing to increase the corporate tax rate from 25 percent to 25.5%.

That proposal didn’t hail from Yechimovich’s opposition ranks but from that of coalition partner Moshe Gafni of the ultra-orthodox UTJ party. He branded the government’s tax policy “dreadful,” contending that “a mere 0.5% corporate tax hike would bring the country into line with other OECD member countries and increase state revenues by an extra NIS 400 million.”

Prima facie, this sounds compelling. But if it is so straightforward, why doesn’t the Treasury seize the obvious opportunity to fill the public coffers with additional much-needed takings? Perhaps because it is far from uncomplicated and trouble-free.

If the entire chorus of critics, ranging from Yechimovich to Gafni, would read a recent study by the American business advisory firm Ernst and Young they might perhaps begin to grasp why.

The study pertains to the American scene but its implications are universal. Its bottom line is that increasing tax rates on corporations, businesses and the wealthy would have “a substantial and sustained negative impact on the economy as a whole... This policy path can be expected to reduce long-run output, investment and net worth.”

In other words, employment would fall, as would indispensable capital ventures and inevitably wages. The very salaried middle class whom Yechimovich, Gafni and their various allies purport to speak for would constitute the very first victims of corporate belt-tightening which more taxes will per force produce.

Clearly our specific numbers and overall economic circumstances differ from those of the US to which Ernst and Young refer, but the principle is identical – subjecting business income to higher taxes contradicts incentives for economic growth. Without growth, no economy can prosper.

Charging more corporate taxes will discourage foreign firms from moving here, will stifle local initiative, cause companies to relocate abroad to kinder tax climates or do the easiest thing of all – pass on the added expenditures to the public. This can be done by a variety of methods, all of which will be painful to ordinary Israelis.

Prices of consumer goods and services could be increased, a direct way of generating company income. Corporations can fiddle with their equity and bond issues. This will have direct bearing even on those of us who don’t count ourselves as players in the financial markets, because we are all invested to a degree in them via pension, provident, mutual and educational funds.

The bitterest blow of all would be to members of the public employed in these businesses. To begin with, they will just hire fewer new employees. Then can come wage cuts and finally layoffs. Those who seemingly wish to spare our modest salaries from a paltry few more shekels per month in taxes could well lose us our livelihoods.

Populists of assorted incarnations and ideologists have always claimed to represent the loosely defined “people” against the equally loosely defined “elites” and their catch-all allure all along has been to make up society’s collective shortfall by taxing the “others.” The trouble is that the amorphous others are taxed.

In Israel, the upper two income deciles pay a full half of all direct and indirect taxes combined. They pay 82% of all direct taxes. Levying yet more extra-cumbersome taxes on them just won’t plug the budget hole. It’d take as much as a 20% hike to achieve that. The resultant 70%+ income tax brackets would merely lead to capital flight and more imaginative tax evasion.

This is the underlying danger of superficial slogans and failure to understand the workings and the interrelated complexities of economic dynamics.